Friday, April 20, 2007

Color on quarter: Intuitive Surgical (NASDAQ:ISRG)

Several firms are commenting on Intuitive Surgical (NASDAQ:ISRG) after the co issued Q1 results last night:

- Deutsche Bank notes that with recurring revenues expected to sustainably make up a majority of company sales going forward, 1Q results clearly demonstrate the earnings power of Intuitive's business model. While system sales will always be a large component, growth in procedures is a longer-term growth driver to a more sustainable and predictable business model. Firm reiterates Buy rating and are raising their tgt to $150.

Based on firm's math, annualized per system utilization in 1Q approximated 133 procedures versus 119 in 4Q06. Gynecology and Urology continue to be the primary drivers of procedure growth, although all robotic indications grew in 1Q.

Importantly, for the first time, the "razorblade" component of the company's razor/razorblade business model accounted for a majority of total sales for the company, which the firm believes represents an important inflection point. Recurring revenue (Instruments/Accessories + Service) represented 51% of total sales in the quarter, with continued growth in this figure allowing for greater visibility to financial results and less lumpiness inherent with system sales. During the quarter, the company sold 44 da Vinci systems (33 U.S. and 11 OUS) versus DB's estimate of 46 systems.

- Cowen notes Intuitive Surgical posted surprisingly strong 1Q results which beat estimates and provedutilization is rising. EPS growth of 63% on a 48% sales gain bolsters firm's confidence that Intuitive shares can outperform the market by 20% this year. Steady increases in procedure utilization are being driven by broad adoption in urology and early traction in gynecology and bariatric surgery. They are raising estimates to reflect 42% sales growth this year and reiterate Outperform.

While new da Vinci system placements of 44 rose by 26% YOY, disposable instrument sales rose by 73%. The installed base rose to 602 systems, up 41% YOY. Utilization in terms of instrument sales per system rose by 23% YOY, double firm's 11% estimate. Potential for utilization to rise 3-fold exists.

- Bear Stearns notes the company placed 44 consoles in 1Q07, below their 47 placement estimate. While below firm's estimate, the figure represented a smaller than usual q/q sequential decline on a percentage basis (-10% q/q) vs. a year ago (-13% q/q).

While the console placements were below their and the Street's expectations, Accessories sales grew 73% y/y (vs. the 58% growth they expected with $36.8M). The barometers of ISRG's growth may have become a two-horse race, where Instrument revenues may begin to outshine console revenues from time to time. And while some investors may fear increased utilization will erode console sales growth, they believe the two metrics are more likely to share similar positive implications about long-term sales and EPS growth.

While they don't anticipate Accessory revenues will become the majority of revenues for some years to come, an acceleration of that process while still maintaining 40%+ top- and bottom-line growth rates should help the stock move higher. Maintains Outperform.

- Wachovia remains positive on ISRG saying that after a period of hyper-growth in system sales during 2005 and 2006, system sales have slowed some. Fortunately, strong procedure growth means that instruments growth has picked up the slack. In fact, Q1 2007 marks the first time that recurring instruments and service revenue made up the majority of ISRG's sales (50.9% of total sales). They view the increased contribution from recurring revenue as a significant positive since it should reduce revenue volatility.

Notablecalls: Following the results out last night, the stock initially shot up to around $126 but then retreated to $118 after it came apparent they had missed the whisper number (44 vs. 46-48) on system placements. I really don't see this as a significant miss as ASP's were up and accessories more than made up the difference. Comments by management helped the stock gain some ground, with the last trades crossing around $123.50. While I think the stock may be dead money for a week or two, I continue to be positive on ISRG and expect it to challenge 52 week highs soon after.

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